The Federal Trade Commission (FTC) has reaffirmed that it will pursue noncompete enforcement through individual cases rather than sweeping rulemaking. In a recent public workshop featuring each of the sitting commissioners and panels of economists and current and former agency attorneys, the FTC stopped short of signaling that it will pursue a new national rule to govern all noncompetition agreements. Instead, the FTC emphasized it will continue to pursue enforcement on a case-by-case basis,1  with a focus on agreements that are overly broad in scope or duration and not narrowly tailored to protect legitimate business purposes. Key Takeaways The FTC indicated it is not pursuing a national rule to ban noncompetition agreements but will continue bringing targeted enforcement actions against agreements it deems overly broad or unjustified. The agency emphasized it views certain noncompetition agreements, particularly those involving lower-wage or non-specialized roles, as anticompetitive and legally suspect, especially when they lack a clear business justification. Employers should review existing noncompete agreements to ensure they are narrowly tailored, reasonable in scope and duration and grounded in a legitimate business interest. Read the full update here.

Yesterday, Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas in Ryan v. The Federal Trade Commission upheld a challenge by business groups to the FTC’s non-compete ban. In addition to confirming her earlier ruling that the FTC non-compete ban was not a valid exercise of agency power, the judge also expanded the limited, temporary injunction entered on July 3, 2024 to hold unlawful and set aside the noncompete-ban in a ruling with a “nationwide effect” that is not limited to the parties in the lawsuit. In other words, the FTC’s non-compete ban will not take effect on September 4 for anyone. The Court concluded that: (1) the FTC lacked statutory authority to promulgate substantive rules concerning unfair methods of competition, i.e. the non-compete ban; and (2) the non-compete ban is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” As a result, the Court found the non-compete ban to be an unlawful agency action. In deciding the appropriate relief, the Court relied on recent precedent from the Fifth Circuit to conclude its ruling must have a “‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’” Thus, the Court’s ruling prevents (1) the FTC from taking any action to enforce the non-compete ban against anyone; and (2) the FTC non-compete ban from taking effect on September 4, 2024—effectively vacating it. What happens next? In the wake of the ruling, the FTC’s spokesperson stated, “[The FTC is] seriously considering a potential appeal.” If the FTC decides to appeal, the decision would be reviewed by the U.S. Court of Appeals for the Fifth Circuit in New Orleans. Any decision rendered by the Fifth Circuit would likely be appealed to the U.S. Supreme Court—meaning the final fate of the FTC’s non-compete will be revisited and could change. Importantly, even though the FTC non-compete ban will likely not go into effect in the immediate future, the FTC still has the power in the interim under Section 5 of the FTC Act to pursue enforcement actions on a case-by-case basis. In reacting to the ruling, an FTC spokesperson stated, “Today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.” If the FTC is to be taken at its word, it appears ready to amplify such enforcement actions in the future. The FTC’s posture could change after the November election depending upon the policies of the next administration. How should employers approach non-competes? Notwithstanding yesterday’s ruling, employers should still be mindful of the enforceability of their non-competes now and in the future. Several states have limited or outright banned the use of non-competes. The move by the FTC could spark additional state legislatures to revisit state-level restrictions as they return from recess and begin new legislative sessions this Fall. The U.S. Congress could also decide to enact legislation of its own; and, it’s conceivable that yesterday’s ruling will serve as a catalyst for Congress to revisit such legislation. Polsinelli attorneys are continually monitoring the evolving landscape of restrictive covenant law and are available to help you evaluate your use of non-competes and other restrictive covenants to protect competitive information.

Yesterday (July 23), a Pennsylvania judge—in ATS Tree Services, LLC v. Federal Trade Commission—upheld the legality of the FTC's non-compete ban. This ruling contradicts the ruling recently issued in a parallel proceeding in Texas. Earlier this month, a Texas judge—in Ryan, LLC v. Federal Trade Commission—temporarily enjoined the FTC’s non-compete ban from going into effect against the named plaintiff/intervenors. Although the Texas judge declined to implement a nationwide injunction, she signaled an intent to uphold the challenge to the non-compete ban in a future ruling based on her finding that the FTC had likely exceeded its statutory authority and a categorical ban on non-competes would be arbitrary and capricious.  The ruling sides with the FTC, creating a divide in the judiciary on the scope of the FTC's regulatory powers and the legality of the FTC’s upcoming non-compete ban (scheduled to take effect on September 4). While the Court’s ruling partially denied a preliminary injunction based on a finding of no irreparable harm, the crux of the opinion held that plaintiff was unlikely to succeed in establishing that the FTC’s non-compete ban is unlawful. In so finding, the judge endorsed the FTC’s interpretation of its procedural and substantive rulemaking authority and concluded that the FTC has the authority to promulgate a rule that effectively bans non-competes nationwide. What comes next? While the Pennsylvania judge's decision provides a lifeline to the quickly approaching non-compete ban, the FTC's win may be short-lived. By August 30, the Texas judge intends to rule on the ultimate merits of the challenge to the non-compete ban, at which time she could issue more expansive, nationwide relief. Additionally, briefing is underway in a third challenge to the non-compete ban filed in Florida (Villages, Inc. v. Federal Trade Commission). It is expected that yesterday’s developments could spur additional legal challenges by employers. We will continue to monitor and report new developments.   What should employers do now? Given the uncertainty of whether the FTC’s non-compete band will go into effect on September 4, employers should consult with counsel about their options and the appropriate steps and contingencies to explore in the interim.

On July 3, a Texas judge in the bellwether lawsuit, Ryan, LLC v. The Federal Trade Commission, became the first to weigh in on the legality of the FTC’s non-compete ban that is set to take effect on September 4. As was widely anticipated, the Court concluded that a preliminary injunction was appropriate, and it temporarily enjoined the non-compete ban from going into effect against the named plaintiff/intervenors to the Ryan lawsuit. Less anticipated, the Court declined to issue a nationwide injunction to non-parties—meaning that the FTC’s non-compete ban currently remains set to take effect on September 4 for all employers who are not named parties in the Ryan lawsuit. In reaching its conclusion, the Court held that the FTC’s rule banning most non-competes is likely unlawful for two reasons: (1) the FTC likely exceeded its statutory authority because it does not have substantive rulemaking authority to craft rules regarding unfair methods of competition; and (2) a categorial ban on nearly all non-competes would likely be arbitrary and capricious because it is overly broad without any reasonable explanation. While these findings are a clear rebuke of the FTC’s actions, the Court expressed doubt about whether it would be appropriate for it to issue a nationwide injunction that would extend to non-parties because such relief is unnecessary to protect the interests of the named parties (which is the focus at the preliminary injunction stage). The implications of this ruling are going to evolve over the next two months. The Court has ordered the parties to submit a joint status report by July 9 to determine the case’s next steps, and it has committed to issuing a final decision on the merits of the entire lawsuit by August 30. This forthcoming merits-based decision could result in a more expansive nationwide injunction that would extend to non-parties; however, many employers may view this as providing little reprieve in the interim because of the anticipated rulings timing with the looming September 4 effective date and actions needed to prepare for that effective date. For now, employers will need to revisit how they intend to approach the FTC’s Final Rule in the days leading up to September 4. Attention will also likely shift to the parallel lawsuit in Pennsylvania, ATS Tree Services, LLC v. The Federal Trade Commission, which leaves open the possibility of a nationwide injunction still being issued by that Court later this month.

Yesterday (May 29), in Ryan, LLC et al. v. The Federal Trade Commission, the FTC filed its response in opposition to Plaintiffs’ request to stay/enjoin the FTC Rule banning non-competes from taking effect on September 4. The Court has committed to issuing a decision on Plaintiffs’ request no later than July 3. Consistent with commentary to the Rule, the main thrust of the FTC’s response argues it has authority to issue the Rule pursuant to the Federal Trade Commission Act’s directive that Congress “empowered and directed” the FTC to prevent the use of unfair methods of competition through rulemaking. The FTC also devotes significant briefing to dispelling the application of the “major questions doctrine” to curtail its regulatory ability. We anticipate the Court’s decision will most likely hinge on whether the Court applies the major questions doctrine – articulated in the U.S. Supreme Court’s 2022 decision in West Virginia v. Environmental Protection Agency – to grant a nationwide injunction enjoining the Rule. In the West Virginia decision, the Supreme Court found the EPA’s policy involved a “major question” and that the agency went too far in its attempt to regulate absent explicit permission from Congress to do so. The U.S. Court of Appeals for the Fifth Circuit employed that same rationale to affirm a preliminary injunction blocking enforcement of President Biden’s COVID-19 federal contractor vaccine mandate. The Fifth Circuit’s decision likely drove the filing of the two lawsuits challenging the Rule in Texas federal courts, which sit in the Fifth Circuit. Plaintiffs' reply briefs are due June 12. Your Polsinelli Restrictive Covenant and Trade Secret Group will continue to monitor these cases and will keep you updated with any major litigation developments.

On April 23, 2024, the Federal Trade Commission (“FTC”) conducted a special Open Commission Meeting to vote on a Final Rule (the “Rule”) banning most non-compete clauses as an “unfair method of competition.” By a vote of 3-2, the Rule was approved for publication in the Federal Register. The Rule becomes effective 120 Days from Publication in the Federal Register (the “Effective Date”). Here is what you need to know: What clauses are impacted by the Rule? The Rule defines a prohibited “non-compete clause” to include any contract term, workplace policy, or term or condition of employment, written or oral, that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking work, accepting work, or operating a business after prior employment ends. Other types of post-employment covenants (e.g., non-solicitation) could be attacked under the Rule if they have the effect of a non-compete. What employers and workers are impacted by the Rule? Generally, the Rule will impact all employers other than certain banks, savings and loan companies, non-profits, and common carriers, which are not subject to the FTC’s authority by law. The Rule applies to paid and unpaid workers, including employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors. The Rule does not apply to the franchisee in a franchisor relationship. What conduct is prohibited by the Rule? The Rule prohibits employers from (1) entering into or attempting to enter into a non-compete clause, (2) enforcing or attempting to enforce a non-compete clause, and (3) representing that a worker is subject to a non-compete clause. The Rule applies to non-compete clauses entered before the Effective Date unless the non-compete clause is with a “Senior Executive”. The exception for “Senior Executives”: Unlike the proposed rule, the final version of the Rule provides an exception for non-compete clauses entered into with Senior Executives before the Effective Date. A Senior Executive means a worker receiving total annual compensation (excluding fringe benefits) of at least $151,164 in the preceding year, and was “in a policy-making position”—meaning the entity’s president, CEO, officer, or other person who has final authority to make policy decisions that control significant aspects of the entity (and not just a subsidiary or affiliate). The exception for “bona fide sales of business”: The Rule does not apply to non-compete clauses entered into “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” The Rule does not limit this exception to only those holding at least 25% ownership interest in a business, like the proposed rule did. What does the Rule require employers to do now? On or before the Effective Date (unless the Rule is enjoined), employers are required to provide all workers with impacted non-compete clauses clear and conspicuous notice to the worker that the non-compete clause will not be, and cannot be, legally enforced against the worker. The notice must be provided in writing by hand deliver, mail, email or text message, and group communications are permissible. The Rule provides model notice language. What happens to existing lawsuits? The Rule does not apply to causes of action related to non-compete clauses that have accrued prior to the Effective Date. Put another way, the Rule likely will not change cases involving alleged violations of non-compete clauses occurring before the Effective Date. What do we expect next? Lawsuits challenging the Rule were filed within hours of the vote, including a lawsuit filed in the United States District Court for the Eastern District of Texas by the U.S. Chamber of Commerce. Given the scope of the Rule and its impact, it is anticipated that at least some courts will enjoin the Rule from taking effect until the U.S. Supreme Court has an opportunity to weigh in on the Rule’s validity and constitutionality. Is there still risk when hiring a competitor’s employees? Yes. The Rule does not take effect for months and may never take effect if the court challenges are successful. The Rule also does not apply to conduct occurring before the Effective Date, so actions taken now still have risk. More importantly, the Rule generally does not eliminate all risk to hiring employees from a competitor because even without non-compete clauses, employers can bring suit based on other contract terms (non-solicitation and non-disclosure clauses), trade secrets, and legal theories to protect their interests when former employees go to work for a competitors. Contact your Polsinelli attorney if you need guidance reviewing your non-compete agreements or strategy around restrictive covenants.

FTC Final Rules Banning Non-Competes Vote Next Tuesday As you know, last year, the FTC issued a proposed rule banning virtually all non-compete agreements (which does not include non-solicitation agreements, confidentiality agreements and the like). Yesterday, the FTC announced that a special Open Commission Meeting will be held virtually on Tuesday, April 23, 2024, at 2 p.m. EDT at which time the FTC is expected to vote on a Final Rule. Here is what you need to know for now: When is the vote on the Final Rule to ban non-competes? Tuesday, April 23, 2024 at 2 p.m. EDT. The Open Commission Meeting will be available to view here.  What is expected to happen? The consensus among Polsinelli’s Restrictive Covenant and Trade Secret Practice Group, other experts, and scholars is that the FTC will vote to implement a Final Rule substantially similar to the Proposed Rule. In short, that means that it will vote to ban essentially all non-competes with limited exceptions (some form of ownership in the entity being sold – the Proposed Rule had a 25% threshold). When will the Final Rule be effective? The Final Rule is expected to become effective 60 days after publication in the Federal Register. (The FTC has the ability to implement the Final Rule sooner if necessary due to an “emergency situation” but we do not anticipate that in this instance.) What can you do now? Understand that the vote will be Tuesday; that does not mean the Rule will be effective Tuesday. Understand that the Rule likely will not be effective until 60 days after publication in the Federal Register and that we anticipate that there will be litigation seeking to block the Rule from going into effect, as discussed below. Evaluate your use of non-competes, and develop strategies for navigating the uncertainties of the time. Strategically and thoroughly analyze your trade secret protocols and protections. What do we expect next? Experts and scholars (and we) fully expect the Final Rule will be challenged in Federal Court with the challenging parties seeking immediate injunctive relief preventing implementation of the Final Rule, based upon the FTC exceeding its authority. Contact your Polsinelli attorney if you need guidance reviewing your non-compete agreements or strategy around restrictive covenants.